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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period Ended December 31, 1998
Commission File No. 0-16176
ASHA CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 84-1016459
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(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
600 C Ward Drive, Santa Barbara, California 93111
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(Address of Principal Executive Offices including zip code)
(805) 683-2331
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(Issuer's telephone number)
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
There were 8,800,115 shares of the Registrant's $.000001 par value Common Stock
outstanding as of December 31, 1998.
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ASHA CORPORATION
FORM 10-QSB
INDEX
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Part I. Financial Information
Item 1. Financial Statements Page
Balance Sheets - December 31, 1998 and September 30, 1998 3-4
Statement of Operations for the three month periods ended
December 31, 1998 and 1997 5
Statement of Cash Flows for the three month period ended
December 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Part II. Other Information and Signatures 13
Signatures 14
2
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ASHA CORPORATION
BALANCE SHEETS
December 31, September 30,
1998 1998
(Unaudited)
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $1,923,211 $2,348,540
Marketable Securities 346,394 --
Accounts receivable 2,722,642 3,653,200
Prepaid expenses and other 17,521 64,183
---------- ----------
TOTAL CURRENT ASSETS 5,009,768 6,065,923
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Property and equipment, at cost,
net of accumulated depreciation
and amortization 632,940 570,382
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Other Assets:
Investment in affiliate 609,557 609,557
Deposits 6,834 --
---------- ----------
TOTAL OTHER ASSETS 616,391 609,557
TOTAL ASSETS $6,259,099 $7,245,862
========== ==========
See accompanying notes to financial statements.
3
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ASHA CORPORATION
BALANCE SHEETS
December 31, September 30,
1998 1998
(Unaudited)
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 161,734 $ 78,000
Accrued payroll and related 148,851 198,111
Accrued professional fees 16,500 30,000
Accrued other liabilities 52,102 31,163
Current portion of long term debt 71,321 63,638
----------- -----------
TOTAL CURRENT LIABILITIES 450,508 400,912
----------- -----------
NOTE PAYABLE - net of current portion 255,129 272,842
----------- -----------
TOTAL LIABILITIES 705,637 673,754
----------- -----------
Stockholders' Equity:
Preferred stock, $.0001 par value:
Authorized - 10,000,000 shares,
no shares issued or outstanding -- --
Common stock, $.00001 par value,
Authorized - 20,000,000 shares
Issued and outstanding - 8,800,115
shares at Dec. 31, 1998 and
8,798,223 at September 30, 1998 88 88
Additional paid-in capital 11,890,976 11,884,000
Accumulated deficit (6,255,695) (5,230,073)
Less: Treasury Stock at cost (81,907) (81,907)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,553,462 6,572,108
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,259,099 $7,245,862
========== ==========
See accompanying notes to financial statements.
4
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ASHA CORPORATION
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
REVENUES:
Contract and other services $ 103,006 $ 440,392
----------- -----------
OPERATING EXPENSES:
Research and development 533,089 294,929
Officers salaries 110,817 105,748
Legal and accounting 53,380 79,638
Patent application 48,771 --
Taxes and licenses 30,441 16,505
General and administrative 346,029 251,749
Depreciation and amortization 32,242 20,884
----------- ----------
1,154,769 769,453
----------- ----------
Loss from operations (1,051,763) (329,061)
OTHER INCOME (EXPENSE):
Loss from investment in affiliate -- (180,616)
Interest income 40,193 63,993
Interest expense (13,252) (394)
----------- -----------
26,941 (117,017)
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Loss before provision for
income taxes (1,024,822) (446,078)
PROVISION FOR INCOME TAXES 800 800
----------- -----------
NET LOSS $(1,025,622) $( 446,878)
=========== ===========
BASIC EARNINGS PER SHARE $ (.12) $ (.05)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 8,805,985 8,674,156
=========== ===========
See accompanying notes to the financial statements.
5
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ASHA CORPORATION
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,025,622) $ (446,878)
Adjustments to reconcile
net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 32,242 20,884
Accrued interest on long-term
receivable -- (33,743)
Loss on investment in affiliate -- 180,616
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 930,561 (234,931)
Prepaid expenses 46,662 (534)
Deposits (6,834)
Increase (decrease) in:
Accounts payable 83,734 34,027
Accrued payroll and related (49,260) --
Accrued professional fees (13,500) --
Accrued other liabilities 20,939 16,015
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Net cash (used in) provided
by operating activities 18,922 (464,544)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (346,394) --
Additions to property and equipment (94,800) (25,474)
Investment in affiliate -- (180,616)
----------- -----------
Net cash used in investing
activities (441,194) (206,090)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under line of credit (10,033) --
Proceeds from issuance of common stock 6,976 15,001
----------- -----------
Net cash provided by (used in)
financing activities (3,057) 15,001
----------- -----------
Net (decrease) increase in cash and
cash equivalents (425,329) 655,633
Cash and cash equivalents at beginning
of period 2,348,540 2,617,354
----------- -----------
Cash and cash equivalents at end
of period $ 1,923,211 $ 1,961,721
=========== ===========
See accompanying notes to financial statements.
6
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ASHA CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
PRESENTATION
The financial statements included herein have been prepared by ASHA
Corporation without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and include all adjustments which are in
the opinion of management, necessary for a fair presentation. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes that the disclosures are adequate to make these financial statements
not misleading; however, it is suggested that these financial statements and
the accompanying notes be read in conjunction with the financial statements
and notes thereto in the Company's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1998. The financial data for the interim periods may
not necessarily be indicative of results to be expected for the year.
BUSINESS ACQUISITION
On January 8, 1999, the Company acquired all of the outstanding stock of
McLaren Engines, Inc. in exchange for 150,000 shares of the Company's
authorized but unissued Common Stock. Immediately prior to the acquisition,
the Company assisted McLaren to complete a reorganization in which McLaren
redeemed the stock of its two shareholders and issued new shares to McLaren's
employees. The Company loaned McLaren $1,355,000 from its operating funds for
the reorganization. McLaren also borrowed $2,454,000 from an unaffiliated bank
to complete this reorganization. The reason for the acquisition of McLaren
Engines is that McLaren and ASHA have many of the same car product development
and drivetrain clients. Through integrating sales, marketing, and R&D
engineering staff, ASHA looks to better serve the worldwide licensee base,
adding new capabilities and core services, while improving net earnings.
CONCENTRATION OF CREDIT RISK
As of December 31, 1998, accounts receivable from New Venture Gear represented
100 percent of accounts receivable. For the three months ended December 31,
1998 revenue from New Venture Gear represented 100 percent of revenue.
MARKETABLE SECURITIES
As of December 31, 1998, marketable securities consist of US Treasury Stripped
Zero Coupon Bond.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common and
common equivalent shares outstanding. Common stock equivalents were not
considered in the calculation, as their effect would be antidilutive.
INCOME TAX
Provisions for income taxes consists of $800 minimum state income tax. The
Company did not provide for federal income taxes due to net operating loss
carryforwards.
7
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CONTINGENT LIABILITIES
The Corporation co-signed a $40,000 note with Montecito Bank and Trust for the
former Managing Director of Automotive Components in Research and Development.
The note is secured by the former employee's residence.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following should be read in conjunction with the Company's Annual Report
on Form 10-KSB and the attached Financial Statements and Notes of the Company.
The following discussion contains forward-looking statements that involve a
number of risks and uncertainties. While this outlook represents the Company's
current judgment in the future direction of the business, such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested herein. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Factors that could cause
results to differ materially from those projected in the forward-looking
statements include: market acceptance of both Gerodisc and the World Car,
acquisition of McLaren Engines, Inc., variability of quarterly operations,
dependence on management, competition, political and economic risks of doing
business in China, and the bureaucratic nature of the automobile industry.
THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED DECEMBER 31,
1997
There was a net loss of $1,025,000 for the three months ended December 31,
1998 as compared to a net loss of $447,000 for the three months ended December
31, 1997. During the three months ended December 31, 1998, the Company had
$103,000 in contract revenue as compared to $440,000 during the corresponding
period last year. This was a result of a decrease in billable hours for
prototype testing during the most recent period. Interest income for the
period ended December 31, 1998 was $39,000 as compared to $64,000 for three
months ended December 31, 1997. The reduction in interest income is due to the
interest income that accrued on the note from New Venture Gear. This note
matured in August, 1998 and was paid in October, 1998.
Operating expenses for the three months ending December 31, 1998 was
$1,155,000 as compared to $769,000 for the corresponding period ending
December 31, 1997. The increase of $386,000 is a result of the following:
research and development costs increased by $239,000, officers salaries
increased $5,000, legal and patent costs increased by $22,000, taxes and
license expenses increased by $14,000, general and administrative costs
increased by $94,000, and depreciation and amortization expense increased by
$12,000. In addition to the increased operating expenses mentioned above
interest expense increased by $13,000 because of finance costs associated with
the purchase of engineering and fabrication software and hardware.
As previously noted, research and development costs increased by $239,000.
Engineering salaries increased by $134,000 over the previous year because five
additional engineers were employed within the past year to expedite the
development of prototypes for the Gerodisc technology. Fabrication wages
increased $52,000 as a result of employing an additional machinist, cost of
living increases, and overtime costs associated with prototype production.
Payroll taxes and related expenses increased as a direct result of increased
payroll by $13,000. Additional building rents increased approximately $20,000
as additional square footage was acquired for planned expansion.
9
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General and administrative costs increased by $94,000 as previously noted.
Administrative salaries increased $30,000 for the three months ended December
31, 1998 as compared to the prior period, due to the addition of professional
and administrative staff in anticipation of future growth and acquisition.
Additional sales and marketing efforts in Europe attributed to $14,000 of the
increased expenses. Wages and related benefits related to the After Market
Program were approximately $42,000 for the period ended December 31, 1998. The
Company's efforts to improve investor relations resulted in increased expenses
of approximately $7,000.
The Company did not record any losses related to the investment in the ASHA-
TAISUN Joint Venture during the three months ended December 31, 1998 as
compared to a net loss of $180,000 for the prior year. The decrease was due to
the transfer of technology to the Chinese investment. The Company reduced its
ownership to 18% in exchange for royalties to be given per unit produced. The
Company is maintaining approximately $600,000 of its investment on the balance
sheet in anticipation of pending production and royalties.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had working capital of approximately
$4,600,000 as compared to working capital of approximately $5,665,000 at
September 30, 1998. The decrease was primarily due to the net operating loss
the Company recorded in the quarter ended December 31, 1998, and the
$1,000,000 note receivable payment from New Venture Gear in October 1998.
On February 20, 1998, the Company renewed its $750,000 credit line with
Montecito Bank & Trust. As of December 31, 1998 no advances had been made on
the credit line. Amounts under the credit line bear interest at the prime
rate, which is currently 7.75%, plus 1.0%, and the credit line is renewable on
an annual basis. As of December, 1998, the annual rate of interest for the
credit line was 8.75%. On February 20, 1998 the Company negotiated a 60 month
$300,000 long-term note to partially finance the acquisition of engineering
Computer-Aided-Design software. Amounts under the note bear interest at the
prime rate plus 1.0%. The current rate being charged is 8.75%. On April 21,
1998 the Company negotiated a 60 month $70,000 long-term note to partially
finance the acquisition of fabrication hardware and software. As of December,
1998 the annual rate of interest for the equipment note is 9.5%. The total
amount owed to Montecito Bank and Trust as of December 31, 1998 is
approximately $336,000. Principal payments on the above notes were $10,000
for the quarter ended December 31, 1998.
On January 5th 1998, the Company signed a license agreement with New Venture
Gear, a major tier one supplier. The agreement provided for a $5,100,000 fee
payable in two equal installments due respectively on January 31, 1998 and
January 31, 1999. The Company received the first installment of $2,550,000 on
January 31, 1998, as per the payment schedule. Payment has not been received
as of February 11, 1999, but the Company expects to receive payment in full.
With the cash from the licenses, the Company believes it will have sufficient
liquidity to maintain continued operations for the next twelve months.
Operating activities for the three months ended December 31, 1998 provided
$2,000 of net cash as compared to $460,000 cash used in the three months ended
December 31, 1997. The increase in cash provided by operating activities was
primarily due to the first royalty installment of $1,000,000 from the New
Venture Gear license agreement.
10
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Investing activities for three months ended December 31, 1998 used $425,000 of
cash as compared to $205,000 used for the comparable period in 1997. The
Company invested $346,000 in United States securities during the current
period. Fabrication equipment was purchased and other leasehold improvements
were made which utilized approximately $95,000 of cash during the three months
ended December 31, 1998. No investment was made in the ASHA-Taisun joint
venture during the current year as compared to $181,000 invested during the
three months ended December 31, 1997. The reduction in expenditures for the
joint venture is due to the transfer of production responsibility to the
Chinese operation, thus eliminating staff and support expenses at the Santa
Barbara location.
On January 8, 1999, the Company acquired all of the outstanding stock of
McLaren Engines, Inc. in exchange for 150,000 shares of the Company's
authorized but unissued Common Stock. Immediately prior to the acquisition,
the Company assisted McLaren to complete a reorganization in which McLaren
redeemed the stock of its two shareholders and issued new shares to McLaren's
employees. The Company loaned McLaren $1,355,000 from its operating funds for
the reorganization. McLaren also borrowed $2,454,000 from an unaffiliated bank
to complete this reorganization. The reason for the acquisition of McLaren
Engines is that McLaren and ASHA have many of the same car product development
and drivetrain clients. Through integrating sales, marketing, and R&D
engineering staff, ASHA looks to better serve the worldwide licensee base,
adding new capabilities and core services, while improving net earnings.
COMMITMENTS AND CONTINGENCIES
On February 2, 1999, the Company accessed $100,000 of its credit line with
Montecito Bank and Trust to purchase various equipment and automobiles for
prototype testing. The Company is in the process of applying for installment
notes for equipment and will be repaying the advance on the line of credit.
YEAR 2000 ("Y2K") COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Systems at risk include
information technology (IT) and non-IT systems. IT systems are computer
hardware, software, and related networking equipment. Non-IT systems include
telecommunications equipment, manufacturing and test equipment, HVAC, and
security access. ASHA Corporation is addressing potential Year 2000 Issues,
and believes that significant additional costs will not be incurred because of
this circumstance.
THE COMPANY'S STATE OF READINESS
Based on a recent assessment, ASHA Corporation has determined that it will be
required to modify or replace minor portions of its hardware and software so
that its computer systems will properly utilize dates beyond December 31,
1999. No assessments have been performed for the impact on McLaren Engines,
Inc. as of this filing.
11
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ASHA Corporation is initiating formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. However, there can be no guarantee that the systems of other
companies on which ASHA's systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible
with ASHA Corporation's systems, would not have material adverse effect on the
Company.
ASHA Corporation will utilize both internal and external resources to
reprogram, or replace, and test systems for Year 2000 modifications. The
Company plans to complete the Year 2000 project within one year or not later
than September 30, 1999.
THE COSTS OF ADDRESSING OF COMPANY'S Y2K ISSUES
ASHA Corporation expects they Year 2000 project to be approximately $20,000.
Of the total project cost, approximately 80% is attributable to the purchase
of new hardware and/or software which will be capitalized. The remaining 20%,
which will be expensed as incurred over the current year, is not expected to
have a material effect on the results of operations. To date, ASHA has
incurred insignificant expenses related to the assessment of, and preliminary
efforts in connection with, its Year 2000 project and the development of a
remediation plan.
The costs of the project and the date on which ASHA Corporation plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including
the continued availability of certain resources, third party modification
plans and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
THE RISKS OF THE COMPANY'S Y2K ISSUES
ASHA Corporation is in the process of determining the impact of the Y2K issue.
Worst case scenarios have not yet been explored. The Company is uncertain
what, if any, material effects the Y2K issue will have on its financial
condition. A formal assessment of the Company's Y2K risks is expected to be
completed by mid-1999.
THE COMPANY'S CONTINGENCY PLANS
ASHA Corporation will develop contingency plans as needed based on the
examination if Y2K issues and worst case scenarios.
12
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June 1998, Dana terminated a license agreement with the Company to
manufacture and market the Company's GERODISC System Technology for front and
rear axles, just prior to the start of volume production for the 1999 Jeep
Grand Cherokee vehicle program.
On September 9, 1998, the Company filed a lawsuit against Dana in the United
States District Court for the Eastern District of Michigan, Southern Division.
The Company's complaint, as amended, alleges that Data breached its
obligations under the license agreement and that Data has been unjustly
enriched by the information it obtained concerning the GERODISC System. The
Company is seeking compensatory and punitive damages and attorneys' fees from
Dana and preliminary and permanent injunctions against Data from using the
GERODISC technology.
Dana filed a motion to dismiss certain claims included in the original
complaint to which the Company responded and amended its complaint. The court
has not yet ruled on the motion, and Dana has not yet filed its answer in this
lawsuit.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
The Company has not invested any money in its ABC Technology for the 3 months
ending December 31, 1998. The expenditures for the prior year were for the
development of the ABC technology and to technically support the Chinese
factory in its testing of the pre-production vehicles. At the end of June
1998, the Company had finished transferring the technology for the ABC Taxi to
the Chinese factory. The Company has chosen to reduce its ABC activities in
relation to finding other ABC licensees due to the severe economic situations
in South East Asia. The factory will begin limited production at the
completion and evaluation of the 125 kilometer tests.
The Chinese Factory operation still expects to produce up to 10,000 vehicles
annually. Original export expectations may be effected by recent economic
events in Southeast Asia. The Company has completed its build of the
production tooling and molds for JIAD. The Jiaxing facility have built 15
pre-production units. These units are undergoing various dynamic tests to
prove durability and performance. Upon successful completion of such tests
JIAD intends to commence production. JIAD exhibited the ABC Taxi (called
"BUDDY" in China) at the Bejing auto exposition where it was favorably
received. The Company has been advised by JIAD that it has orders from Taxi
companies in Jiaxing and other provinces as well as from Mongolia.
13
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibit is filed with this report:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASHA CORPORATION
Date: February 15, 1999 By:/s/ John C. McCormack
John C. McCormack, President
By:/s/ Steve Sanderson
Steve Sanderson, Chief Financial
Officer
14
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EXHIBIT INDEX
EXHIBIT METHOD OF FILING
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27. Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages 3-5 of the
Company's Form 10-QSB for the year to date, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,923,211
<SECURITIES> 346,394
<RECEIVABLES> 2,722,642
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,009,768
<PP&E> 632,940
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,259,099
<CURRENT-LIABILITIES> 450,508
<BONDS> 0
<COMMON> 88
0
0
<OTHER-SE> 5,553,374
<TOTAL-LIABILITY-AND-EQUITY> 6,259,099
<SALES> 103,006
<TOTAL-REVENUES> 103,006
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,154,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,252
<INCOME-PRETAX> (1,024,822)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,025,622)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,025,622)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
